It looks like Greek Prime Minister Tsipras is finally getting the country to where he was heading all the time: out of the euro. After winning an extension in February of current bailout conditions, the Syriza-led government has made practically no progress toward accommodating the demands from its creditors. On the contrary, it is increasingly obvious that Tsipras is trying to manipulate the circumstances to where he has no choice but to declare a Greek euro exit.
Yesterday the Greek blog MacroPolis explained:
The Greek government faces a dire financial situation in the coming weeks, especially as lenders are unlikely to relent on the conditions of last month’s loan extension. In fact, Tsipras’ insistence on of pushing for a “political deal” is going nowhere: German Chancellor Angela Merkel, who he will meet in Berlin next Monday, 23 March, is unlikely to deviate from her preference for technical, rule-based solutions. Therefore, the risk of an internal default due to the inability to pay salaries and pensions is not negligible.
Tsipras knows that he has no leverage. If he wanted to keep Greece in the euro zone he would never have run the negotiations to this point. But he has, which strongly suggests that I was correct when I wrote on March 1:
Prime minister Tsipras wants Greece to secede from the euro zone so he can pursue his Chavista socialist agenda on his own. He cannot do that without a national currency, but so long as a large majority of Greeks want to keep the euro he cannot outright declare currency independence. He needs to build momentum and create the right kind of political circumstances. This extension of status quo gives him four more months to do so.
It is very likely that the Germans have called Syriza’s game. As a counter-strategy they refuse to concede anything more, but are instead doubling down on their demands and conditions for a bailout. Reports the Telegraph:
Greece’s hard-Left government has been told to redouble its reform efforts in a bid to begin rebuilding the trust of its eurozone partners after a marathon four-hour meeting of European leaders in the early hours of Friday morning. With the clock ticking on securing the country’s future in the eurozone, Athens was urged to speed up its commitment to raising revenues and overhauling its economy by Germany’s chancellor.
Apparently, Chancellor Merkel has decided to play the chicken race that Alex Tsipras has been begging for ever since he was elected. According to the EU Observer, Merkel’s allies in the EU leadership have de facto made Tsipras an ultimatum:
Give us a list of reforms, and you might get the money you need, Alexis Tsipras was told at a three-hour meeting with select EU leaders on Thursday (19 March). The Greek prime minister met with German chancellor Angela Merkel and French president Francois Hollande. The heads of the EU Council and European Commission, Donald Tusk and Jean-Claude Juncker were also present, as well as European Central Bank chief Mario Draghi and Eurogroup chairman Jeroen Dijsselbloem. Tsipras was reminded that his government must stick to the Eurogroup’s previous, 20 February agreement. He was also told his partners are waiting for precise figures about the state of Greece’s finances and for a set of detailed reform proposals.
Merkel would not push Prime Minister Tsipras for the sake of saving him. She could not care less for a political half-wit from a broke-and-beaten Mediterranean outlier. No, her motives are at a much higher level. She has realized that the days are numbered for the common currency project. Greece is tugging away at its corner of the European currency; a party similar to Syriza is rapidly rising in Spanish politics, opening the possibility for Spain to eventually follow Greece toward currency secession; and then there is the constantly present threat of a President Le Pen in France whose first executive order would be to revive the franc.
On top of this Chancellor Merkel is looking at the exceptional depreciation of the euro over the past year. While this is good for exports, it has had no visible effect on domestic economic activity in the EU, especially not in the euro zone. The ECB has emptied out all its conventional monetary-policy measures and even resorted to unconventional stupidities like negative interest rates on bank overnight deposits. Yet none of this has helped get the European economy out of its state of stagnation.
Whichever way the chancellor looks, the euro is a lost cause. The remaining question then is: who is going to write the script for the end of the common currency? Is it going to be the rogues in Athens (and Madrid) or is it going to be the Germans? By being at least as principled as Tsipras, Angela Merkel is taking charge of the euro dissolution process. Her goal is to guarantee an orderly return to national currencies – and when that return will happen.
Prime Minister Tsipras can look wobbly and indecisive next to Merkel, but nobody should make the mistake of believing that the Syriza-led government eventually wants to stay in the euro. As Euractiv reports, the secessionist attitudes that characterize Syriza are not limited to economic issues:
The Syriza-led government will be against an Energy Union that undermines Greece’s national interests, including in its relations with Russia, said Greek energy minister Panagiotis Lafazanis, who also ruled out any privatisation schemes for the country’s energy sector.
So there you have it. The journey toward “Grexit” continues. The only question is who will blink first – i.e., who is going to be the first to give up on the Greek euro membership? Will Merkel say “I’m firing you” or will Tsipras say “You can’t fire me, I quit”?
The fiscal stress on the euro-zone continues. Last week the EU non-solved the Greek problem:
Eurozone finance ministers on Tuesday (24 February) approved a list of reforms submitted by Athens and cleared the path for national parliaments to endorse a four-month extension of the Greek bailout, which otherwise would have run out on 28 February. “We call on the Greek authorities to further develop and broaden the list of reform measures, based on the current arrangement, in close coordination with the institutions,” the Eurogroup of finance ministers said in a press statement.
Don’t expect that to happen. Prime minister Tsipras wants Greece to secede from the euro zone so he can pursue his Chavista socialist agenda on his own. He cannot do that without a national currency, but so long as a large majority of Greeks want to keep the euro he cannot outright declare currency independence. He needs to build momentum and create the right kind of political circumstances. This extension of status quo gives him four more months to do so.
The question is what those circumstances will look like. The EU Observer article provides a hint:
[The] IMF, while saying it can support the conclusion that the reforms plan is “sufficiently comprehensive”, criticised the plan for lacking details particularly in key areas. “We note in particular that there are neither clear commitments to design and implement the envisaged comprehensive pension and VAT policy reforms, nor unequivocal undertakings to continue already-agreed policies for opening up closed sectors, for administrative reforms, for privatisation, and for labour market reforms,” IMF chief Christine Lagarde wrote in a letter to Eurogroup chief Jeroen Dijsselbloem.
These are reforms that the new socialist government in Athens would not want to carry out. It is a good guess that they will be punting on the reforms to provoke the IMF into making an ultimatum. At that point Tsipras can tell the Greek people that he will not subject them to any more IMF-imposed austerity, and the only way he can protect them is to re-introduce the drakhma.
Will this happen in four months? It remains to be seen. But there is no way that Tsipras is going to tow the line dictated by the IMF, the ECB and the EU. His very rise to political stardom is driven by unrelenting opposition to such fiscal subordination.
In other words, the Greek crisis is far from over and will continue to be a sore spot on the euro-zone map. If it were the only one, the euro zone and the entire EU political project might still have a future. That is not the case, however:
The European Commission on Wednesday (25 February) gave France another two years to bring its budget within EU rules – the third extension in a row – saying that sanctions represent a “failure”. France has until 2017, having already missed a 2015 deadline, to reduce its budget from the projected 4.1 percent of GDP this year to below 3 percent. “Sanctions are always a failure,” said economic affairs commissioner Pierre Moscovici adding that “if we can convince and encourage, it is better”.
This is a non-solution similar to the Greek one, though for somewhat different reasons. In the Greek case the EU does not want to provoke an imminent Greek currency secession; in France they do not want to give anti-EU politicians more gasoline to pour on the European crisis fire.
What the European leadership does not seem to realize, or at least will not admit, is that the euro will lose either way. By pushing Greece too hard the EU Commission will give Tsipras his excuse to reintroduce the drakhma; by treating France with silk gloves the Commission hollows out the enforcement backbone of the currency union. Known as the Stability and Growth Pact – the balanced-budget requirement built into the EU constitution – it was supposed to hold sanctions as a sword over member states to minimize budget deficits. Now the EU Commission has effectively neutered the Pact and created an ad-hoc environment where austerity is forced upon some countries but not others.
With no sanctions there are no incentives for the states to comply. On the contrary: compliance means austerity, which comes with a big political price tag for the member states; non-compliance, on the other hand, comes with no price tag whatsoever.
To be blunt, the silk-glove treatment of France has put the final nail in the coffin of the Stability and Growth Pact. Aside from its consequences for the inherent strength of the euro, this silk glove stands in sharp contrast to the iron fist that the Commission presented Greece with already in 2010. The EU Observer again:
Valdis Dombrovskis, a commission vice-president dealing with euro issues, admitted that France is the “most complicated” case discussed on Wednesday. Paris is in theory in line for a fine for persistent breaching of the euro rules. However the politics of outright punishing a founding member of the EU, a large member state, and a country where the economically populist far-right is riding high in the polls, has always made it unlikely that the commission would go down this route.
This is of course a major mistake. The only mitigating circumstance is that France is not yet in a situation where it requires loans from the EU-ECB-IMF troika to pay its bills. But if the socialist government generally continues with its current entitlement-friendly, tax-to-the-max policies it will not see its budget problems go away.
Down the road there is at least a theoretical possibility that France could be sucked into the bailout hole. More likely, though, is that Marine Le Pen will be elected president in 2017 and pull France out of the euro. That will, so to speak, solve the problem for both parties.
I have said this before and I will maintain it ad nauseam: so long as Europe’s political leaders persist in their fervent defense of the welfare state, they will continue to drive their continent deeper and deeper into the macroeconomic quagmire called industrial poverty.
The answer to the question whether or not Greece will stay in the euro will probably be given this week. New socialist prime minister Tsipras is not giving the EU what it wants, jeopardizing his country’s future inside the currency union:
Talks between Greece and eurozone finance ministers broke down on Monday with an ultimatum that Athens by Friday should ask for an extension of the current bailout programme which runs out next week. Greek finance minister Yanis Varoufakis said he would have been willing to sign off on a proposal made by the EU commission, which was more accommodating to Greek demands, but that the Eurogroup offer – to extend the bailout programme by six months – was unacceptable. The battle is about more than just semantics. EU officials say Greece cannot cherrypick only the money-part of a bailout and ignore the structural measures that have to be implemented to get the cash. “If they ask for an extension, the question is, do they really mean it. If it’s a loans extension only, with no commitments on reforms, there is an over 50 percent chance the Eurogroup will say no,” one EU official said. Failure to agree by Friday would leave very little time for national parliaments in four countries – notably Germany – to approve the bailout extension. It would mean Greece would run out of money and be pushed towards a euro-exit. … As for the prospect of letting Greece face bankruptcy to really understand what’s at stake, an EU official said “there is no willingness, but there is readiness to do it”.
The mere fact that there is now official talk about a possible Greek exit from the euro is a clear sign of how serious the situation is. It is also an indication that the EU, the ECB and the governments of the big EU member states have a contingency plan in place, should Greece leave the euro.
My bet is that Tsipras is gambling: he wants out of the euro, but with a majority of Greeks against a reintroduction of the drachma he cannot go at it straightforwardly. He has to create a situation where his country is given “no choice” but to leave. This is why he is negotiating with the EU in a way that he knows is antithetical to a productive solution.
The reason why Tsipras wants out is simple: he is a Chavista socialist and wants to follow in the footsteps of now-defunct Venezuelan president Hugo Chavez. That means socialism in one country. (A slight rephrasing of the somewhat tarnished term “national socialism”.) In order to create a Venezuelan-style island of reckless socialism in Europe, Tsipras needs to get out of the euro zone.
Should he succeed, it is likely that other countries will follow his example, though for different ideological reasons. However, there is more at stake in the Greek crisis than just the future of the euro zone. Tsipras is riding a new wave of radical socialism, a wave that began moving through Europe at the very depth of the Great Recession. Statist austerity was falsely perceived as an attempt by “big capitalism” to dismantle the welfare state. It was not – quite the contrary: statist austerity was a way for friends of big government to preserve as much as possible of the welfare state.
However, socialists have never allowed facts to get in the way of their agenda. And they certainly won’t let facts and good analysis get in the way of their rising momentum. What started mildly with a socialist victory in the French elections in 2012 has now borne Tsipras to power in Greece and is carrying complete political newcomers into the center stage of Spanish politics. But this new and very troublesome wave of socialism is not stopping at member-state capitals. It is reaching into the hallways of EU politics as well. As an example, consider these words on the Euractiv opinion page by Maria João Rodrigues MEP, Vice-Chair of the Socialists and Democrats Group in the European Parliament, and spokesperson on economic and social policies:
The Greek people have told us in January’s elections that they no longer accept their fate as it has been decided by the European Union. For those who know the state of economic and social devastation Greece has reached, this is only a confirmation of a survival instinct common to any people. The Greek issue has become a European issue, and we are all feeling its effects.
This is a frontal attack on EU-imposed austerity, but it is also a thinly veiled threat: unless Europe moves left, the left will move Europe.
Back to Rodrigues:
European integration can only have a future if European decisions are accepted as legitimated by the various peoples who constitute Europe. Decisions at European level require compromises, as they have their origins in a wide variety of interests. But these compromises must be perceived as mutual and globally advantageous for all Member States involved, despite the commitments and efforts they entail. The key question now is whether it will be possible to forge a new compromise, enabling not only to give hope to the Greek people, but also to improve certain rules of today’s European Union and its Economic and Monetary Union.
This should not be misinterpreted as a call for return of power to the member states. The reason why is revealed next:
We need a European Union capable of taking more democratic decisions and an Economic and Monetary Union which generates economic, social and political convergence, not ever-widening divergence. If Europe is unable to forge this compromise, and if the rope between lenders and borrowers stretches further, the risks are multiple: financial pressures for Greece to leave the euro; economic and social risks of continued stagnation or recession, high unemployment and poverty in many other countries; and, above all, political risks, namely further strengthening of anti-European or Eurosceptic parties in their aspiration to lead national governments, worsening Europe’s fragmentation.
The fine print in this seemingly generic message is: more entitlement spending to reduce income differences – called “economic and social convergence” in modern Eurocratic lingo – and a central bank the policies of which are tuned to be a support function for fiscal expansion. The hint of this is in the words “If the rope between lenders and borrowers stretches further”: member states should be allowed to spend on entitlements to reduce income differences, and if this means deficit-spending, the ECB should step in and monetize the deficits.
Rodrigues offers yet another example of the same argument:
[Many of] Greece’s problems were aggravated by the behaviour of the European Union: Firstly, it let Greece exposed to speculative market pressures in 2010, which exacerbated its debt burden. Secondly, when the EU finally managed to build the necessary financial stabilisation mechanisms, it imposed on Greece a programme focused on the reduction of the budget deficit in such an abrupt way that the country was pushed into an economic and social disaster. Moreover, the austerity measures resulted in a further increase of Greece’s debt compared to its GDP.
It is apparently easy for the left to look away from such obvious facts as the long Greek tradition of welfare-state spending. But that goes with the leftist territory, so it should not surprise anyone. More important is the fact that we once again have an example of how socialists use failed statist austerity to advocate for even more of what originally caused the crisis, namely the big entitlement state. They want to turn the EU and the ECB into instruments for deficit-spending ad infinitum to expand the welfare state at their discretion.
To further drive home the point that what matters is the welfare state, Rodrigues moves on to her analysis of Greece:
What Greece needs now is a joint plan for reform and reconstruction, agreed with the European institutions. This plan should replace the Troika programme, while incorporating some of its useful elements. Crucially, it should foresee a relatively low primary surplus and eased conditions of financial assistance from other eurozone countries, in order to provide at least some fiscal room for manoeuvre for the country. In return, the plan should set out strategic reforms to improve the functioning of the Greek economy and the public sector, including tax collection, education, employment and SMEs services as well as ensuring a sustainable and universal social protection system.
There is no such thing as a “sustainable and universal social protection system”. When Europe’s new generation of socialist leaders get their hands on the right policy instruments they will turn all government-spending faucets wide open. Deficits will be monetized and imbalances toward the rest of the world handled by artificial exchange-rate measures (most likely of the kind used by now-defunct Hugo Chavez).
If this new wave of socialism will define Europe’s future, then the continent is in very serious trouble.
A short-term measure of the strength of the momentum will come later this week when we will know whether or not Greece will remain in the currency union. Beyond that, things are too uncertain to predict at this moment.
After a delay with its national accounts publications, Eurostat has now caught up. Fourth-quarter numbers are beginning to sip out, with the following press release last Friday:
Seasonally adjusted GDP rose by 0.3% in the euro area (EA18) and by 0.4% in the EU28 during the fourth quarter of 2014, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the third quarter of 2014, GDP grew by 0.2% in the euro area and by 0.3% in the EU28.
More important, though, is the annual growth rate:
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 0.9% in the euro area and by 1.3% in the EU28 in the fourth quarter of 2014, after +0.8% and +1.3% respectively in the previous quarter. During the fourth quarter of 2014, GDP in the United States increased by … 2.5% (after +2.7% in the previous quarter).
The U.S. economy is still way ahead of Europe, and there are no signs of this parity shrinking. For the three countries where Eurostat has reported individual 2014 GDP numbers, inflation-adjusted growth rates are far from impressive:
- Germany: 1.61 percent;
- France: 0.38 percent;
- Greece: 0.87 percent.
For the two largest economies in the euro zone, Germany and France, the combined growth rate is 1.08 percent. That is a minuscule uptick over the second and third quarter annual growth rates of 0.99 and 1.02 percent, respectively. Furthermore, while the combined growth rate for Germany and France is slowly increasing, the individual growth rates for the two countries are going in different directions. Again, annual inflation-adjusted growth rates reported by quarter:
Frustrating comments are already pouring out over the internet. EUbusiness.co. says that the numbers are “too weak to convincingly signal a full-blown recovery”. They are absolutely right. Analysts quoted by EUbusiness.com attribute the slight uptick in growth to falling oil prices and a weaker euro. Both of these are external factors, which means that Europe still has no core growth power. It is also important to remember that the weak euro partly is attributable to concerns about the future of the currency. With Greece basically in open defiance of payment obligations and EU-imposed austerity programs, and with countries like Portugal and Italy likely to join Greece should Athens decide to secede from the currency union, there are complicated, long-term reasons for a weak euro.
One analyst suggests to EUbusiness.com that the fact that the ECB has basically eliminated interest rates is adding so much to the picture that it is time to talk about a European recovery:
The ECB’s version of so-called quantitative easing has already decreased government borrowing prices across most of the currency bloc and weakened the euro, which should help to boost exports in Europe. “For the first time in two years, we can say that the region is going for solid growth,” Anna Maria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan, told Bloomberg News. “The euro area is supported by the very strong tailwinds of the fall of the euro, the fall of oil prices and the fall of interest rates sparked by ECB QE.”
However, as I explained last week, the zeroing of interest rates has at best led to a temporary boost in business investments. There are no signs of a permanent recovery.
I will repeat this ad nauseam: unlike the American economy, the European economy has no reason to recover.
There have been many attempts at predicting which way Greece is going to go under the new socialist government. Most of the voices heard thus far seem to agree that Prime Minister Tsipras will not seek a confrontational course against the EU. That is, however, a mistake. This is a man who considers now-defunct Venezuelan president Hugo Chavez a political hero. Tsipras is also a former communist (though being a former communist and at the same time a fan of now-defunct Hugo Chavez is a matter of political semantics) whose training in politics and – to the extent it exists – in economics is fully governed by those ideological roots.
It is only logical that he continues to raise the volume vs. Brussels. Alas, from Euractiv:
Greek Prime Minister Alexis Tsipras laid out plans on Sunday (8 February) to dismantle Greece’s “cruel” austerity programme, ruling out any extension of its international bailout and setting himself on a collision course with his European partners at a summit in Brussels later this week. In his first major speech to parliament since storming to power last month, Tsipras rattled off a list of moves to reverse reforms imposed by European and International Monetary Fund lenders; from reinstating pension bonuses and cancelling a property tax to ending mass layoffs and raising the mininum wage back to pre-crisis levels.
There are two reasons to take this man seriously. The first has to do with his admiration of now-defunct Hugo Chavez. Fans of so called Bolivarian socialism – the ideological niche Chavez carved out for himself and his project to destroy Venezuela – truly believe in the idea of socialism in one country. They are not ideologically or intellectually opposed to “going at it alone”: on the contrary, it would be entirely in line with their thinking to try to repeat in Greece what now-defunct Hugo Chavez did in Venezuela. This means, as I have explained several times before, that Tsipras and his party, Syriza, would be more than happy to try to turn Greece into a European Venezuela.
In addition to terrible economic consequences, this would mean cutting some key economic and political ties between Greece and the EU. A termination of EU-imposed austerity and a reintroduction of the drachma are high on that list.
The second reason to take Tsipras seriously will be revealed in just a moment. First, back to Euractiv:
Showing little intent to heed warnings from EU partners to stick to commitments in the €240 billion bailout, Tsipras said he intended to fully respect campaign pledges to heal the “wounds” of the austerity that was a condition of the money. Greece would achieve balanced budgets but would no longer produce unrealistic primary budget surpluses, he said, a reference to requirements to be in the black excluding debt repayments. “The bailout failed,” the 40-year-old leader told parliament to applause. “We want to make clear in every direction what we are not negotiating. We are not negotiating our national sovereignty.” In a symbolic move that appeared to take direct aim at Greece’s biggest creditor, Tsipras finished off his speech with a pledge to seek World War II reparations from Germany.
In effect, that means writing off German loans. But wait – there is more. Let’s continue with the Euractiv article and listen to the political arrogance of Prime Minister Tsipras:
Tsipras ruled out an extending the bailout beyond 28 February when it is due to end. But he said he believed a deal with European partners could be struck on a so-called “bridge” agreement within the next 15 days to keep Greece afloat. “The new government is not justified in asking for an extension,” he said. “Because it cannot ask for an extension of mistakes.” Athens – which is shut out of bond markets and will struggle to finance itself without more aid quickly – plans to service its debt, Tsipras said. “The Greek people gave a strong and clear mandate to immediately end austerity and change policies,” he said. “Therefore the bailout was first cancelled by its very own failure and its destructive results.”
This is quite a high-pitch rhetoric to come from a man whose country cannot function without foreign aid. But herein lies the second reason why it is important to take Tsipras seriously and assume that he means every word he says. From EU Business:
A Greek exit from the euro would see the euro collapse like a house of cards, Finance Minister Yanis Varoufakis warned in comments that triggered a spat with Italy. “Greece’s exit from the euro is not something that is part of our plans, simply because we believe it is like building a house of cards. If you take out the Greek card, the others will collapse,” Varoufakis said in an interview with Italian public broadcaster RAI that was aired on Sunday.
Here is the strategy behind the Greek finance minister’s rant. As PM Tsipras tells the EU, the ECB and the IMF that austerity is over, he flags up that Greece will now begin its long walk out on the left flank. he is now at a point where he can start implementing his long-held dream of a communist, or at least Bolivarian socialist, paradise in Greece. The EU-ECB-IMF troika has very limited resources to put up against the Greeks unilaterally ending austerity – their most formidable weapon would be to kick Greece out of the euro.
Theoretically, the Greek government would not mind that, but they want it to happen on their terms. They want to tell Europe that “you can’t kick us out, because we quit”. That is a risky strategy – they can only push Brussels and Berlin that far – so to increase the likelihood that Greece holds the aces here, finance minister Varoufakis reminds the European leadership what chaos would erupt if they kicked Greece out.
This is a very high-stakes game, for both parties. The first skirmish will be over Greece’s participation in the currency union, with my bets being on Tsipras unilaterally pulling Greece out. That may make him look strong, but in the end Greece will lose. It is their economy and their people who will be subjected to a European version of the Bolivarian socialist paradise that now-defunct Hugo Chavez created.
Today it is time to review in more detail the latest national accounts data from Eurostat. A disaggregation of the spending side of GDP reinforces my long-standing statement: the European economy is in a state of long-term stagnation.
To the numbers. We begin with private consumption, which is the driving force of all economic activity. It is not only a national-accounts category, but an indicator of how free and prosperous private citizens are to satisfy their own needs on their own terms. It is a necessary but not sufficient condition for economic freedom that private consumption is the dominant absorption category.
Once consumer spending starts ticking up solidly, we can safely say there is a recovery under way. However, little is happening on the consumption front: over the past eight quarters (ending with Q3 2014) the private-consumption growth rate for the EU has been 0.3 percent per year. While the increase was stronger in 2014 than in 2013, only half of the EU member states experienced a growth in consumer spending of two percent or more in the last year. The three largest euro-zone countries, Germany, France and Italy, were all at 1.2 percent or less.
One bright spot in the consumption data: Greece, Spain and Portugal, the three member states that have been hit the hardest by statist austerity, now have an annual consumption growth rate well above 2.5 percent. Portugal has been above two percent for three quarters in a row; a closer look at these three countries is merited.
Overall, though, the statist-austerity policies during the Great Recession have caused a structural shift in the European economy that may be hard to reverse. From having been a consumer-based economy with strong exports, the EU has now basically been transformed into an exports-driven economy. On average, gross exports is larger as share of GDP than private consumption.
In theory, one could argue that this is a sign of free-market trade where people and businesses choose to buy what they want and need from abroad instead. I would be inclined to agree – but only in theory. In practice, if households and businesses freely made their choices on a global market, then rising exports would correlate with rising imports and, most importantly, rising private consumption. However, that is not the case in Europe. On average for the 28 EU member states,
- Exports has increased from an unweighted average of 59 percent of GDP in 2007 to an unweighted average of 70 percent in 2014;
- Net exports has also increases, from zero in 2007 (indicating trade balance) to six percent of GDP in 2014 (indicating a massive trade surplus).
If the rising exports had been a sign of increased participation in global trade on free-market terms, then either of two things would have happened: consumption would have increased as share of GDP or imports would have increased on par with exports. In reality, neither has happened, which leads to one of two conclusions:
- There has been a massive increase in corporate investments, which if true would indicate growing confidence in the future among Europe’s businesses; or
- Exports is the only category of the economy that is allowed to grow because it is not subject to the tight spending restrictions imposed by austerity.
Gross fixed capital formation, or “investments” as it is often casually referred to, was an unweighted average of 26 percent in the EU member states in 2007. Seven years later it had fallen to 21 percent. This is clearly a vote of no confidence from corporate Europe. Therefore, only one explanation remains: the discrepancy between on the one hand the rise in gross and net exports and, on the other hand, stagnant private consumption and a declining investment share, is the result of a fiscal policy driven by statist austerity.
The purpose of fiscal policy in Europe since at least the beginning of the Great Recession has been to balance the government budget at any cost. If this statist austerity leads to a painful decline in household consumption or corporate investments, then so be it. As shown by the numbers reported here, years of statist austerity have depressed corporate activity. In fixed prices, gross fixed capital formation in the EU has not increased since 2011:
- In the third quarter of 2011 businesses invested for 607.8 billion euros;
- In the third quarter of 2014 they invested for 602 billion euros.
The bottom line here is that the only form of economic activity that brings any kind of growth to the European economy is – you guessed it – exports. But it is not just any exports. It is exports outside of the EU. How do we know that? Because of the following two tables. First, the average annual private-consumption growth rate, reported quarterly, for the past eight quarters (ending Q3 2014):
|Private consumption growth|
With private consumption growing at less than one percent in 19 out of 28 countries, households in the EU do not form a good market for foreign exporters.
Things a not really better in the category of business investments:
|Gross fixed capital formation|
What this means, in plain English, is that the European economy still is not pulling itself out of its recession.
But is it not possible that things have changed recently? After all, the time series analyzed here end with the third quarter of 2014. There is always that possibility, but one indication that the answer is negative is the latest report on euro-zone inflation. From EU Business:
Eurozone consumer prices fell by a record 0.6 percent in January, EU data showed Friday, confirming deflation could be taking hold and putting pressure on a historic bond-buying plan by the ECB to deliver. The drop from minus 0.2 percent in December appears to back the European Central Bank’s decision last week to launch a bond-buying spree to drive up prices. Plummeting world oil prices were largely to blame for the fall in the 19-country eurozone, already beset by weak economic growth and high unemployment, the EU’s data agency Eurostat said.
If the EU governments let declining oil prices trickle down to consumers – and avoid raising taxes in response – there could be a positive reaction in private consumption. However, lower gasoline and home heating costs will not be enough to turn around the European economy.
More on that later, though. For now, the conclusion is that Europe is going nowhere.
Only a couple of days after the European Central Bank raised white flag and finally gave up its attempts at defending the euro as a strong, global currency, Greek voters drove their own dagger through the heart of the euro. Reports The Telegraph:
Greece set itself on a collision course with the rest of Europe on Sunday night after handing a stunning general election victory to a far-Left party that has pledged to reject austerity and cancel the country’s billions of pounds in debt. In a resounding rebuff to the country’s loss of financial sovereignty, With 92 per cent of the vote counted, Greeks gave Syriza 36.3 percent of the vote – 8.5 points more than conservative New Democracy party of Prime Minister Antonis Samaras.
That is about six percent more than most polls predicted. But even worse than their voter share is how the parliamentary system distributes mandates. The Telegraph again:
It means they will be able to send between 149 and 151 MPs to the 300-seat parliament, putting them tantalisingly close to an outright majority. The final result was too close to call – if they win 150 seats or fewer, they will have to form a coalition with one of several minor parties. … Syriza is now likely to become the first anti-austerity party in Europe to form a government. … The election victory threatens renewed turmoil in global markets and throws Greece’s continued membership of the euro zone into question. All eyes will be on the opening of world financial markets on Monday, although fears of a “Grexit” – Greece having to leave the euro – and a potential collapse of the currency has been less fraught than during Greece’s last general election in 2012.
It does not quite work that way. The euro is under compounded pressure from many different elements, one being the Greek economic crisis. The actions by the ECB themselves have done at least as much to undermine the euro: its pledge last year to buy all treasury bonds from euro-zone governments that the market wanted to sell was a de facto promise to monetize euro-denominated government debt. The EU constitution, in particular its Stability and Growth Pact, explicitly forbids debt and deficit monetization. By so blatantly violating the constitution, the ECB undermined its own credibility.
Now the ECB has announced that in addition to debt monetization, it will monetize new deficit. That was the essence of the message this past Thursday. The anti-constitutionality of its own policies was thereby solidified; when the Federal Reserve ran its multi-year Quantitative Easing program it never violated anything other than sound economic principles. If the ECB so readily violates the Stability and Growth Pact, then who is to say it won’t violate any other of its firmly declared policy goals? When euro-zone inflation eventually climbs back to two percent – the ECB’s target value – how can global investors trust the ECB to then turn on anti-inflationary policies?
Part of the reason for the Stability and Growth Pact was that the architects of the European Union wanted to avoid runaway monetary policy, a phenomenon Europeans were all too familiar with from the 1960s and ’70s. Debt and deficit monetization is a safe way to such runaway money printing. What reasons do we have, now, to believe that the ECB will stick to its anti-inflationary pledge when the two-percent inflation day comes?
This long-winded explanation is needed as a background to the effects that the Syriza victory may have on the euro. I am the first to conclude that those effects will be clearly and unequivocally negative, but as a stand-alone problem for the ECB the Greek hard-left turn is not enough. In a manner of speaking, the ECB is jeopardizing the future of the euro by having weakened the currency with reckless monetary expansionism to the point where a single member-state election can throw the future of the entire currency union into doubt.
Exactly how the end of the euro will play out remains to be seen. What we do know, though, is that Thursday’s deficit-monetization announcement and the Greek election victory together put the euro under lethal pressure. The deficit-monetization pledge is effectively a blank check to countries like Greece to go back to the spend-to-the-end heydays. Since the ECB now believes that more deficit spending is good for the economy, it has handed Syriza an outstanding argument for abandoning the so-deeply hated austerity policies that the ECB, the EU and the IMF have imposed on the country. The Telegraph again:
[Syriza], a motley collection of communists, Maoists and socialists, wants to roll back five years of austerity policies and cancel a large part of Greece’s 320 billion euro debt, which at more than 175 per cent of GDP is the world’s second highest proportional to the size of the economy after Japan. … If they fulfil the threats, Greece’s membership of the euro zone could be in peril. Mr Tsipras has toned down the anti-euro rhetoric he used during Greece’s last election in 2012 and now insists he wants Greece to stay in the euro zone. Austerity policies imposed by the EU and International Monetary Fund have produced deep suffering, with the economy contracting by a quarter, youth unemployment rising to 50 per cent and 200,000 Greeks leaving the country.
Youth unemployment was up to 60 percent at the very depth of the depression. Just a detail. The Telegraph concludes by noting that:
Mr Tsipras has pledged to reverse many of the reforms that the hated “troika” of the EU, IMF and European Central Bank have imposed, including privatisations of state assets, cuts to pensions and a reduction of the minimum wage. But the creditors have insisted they will hold Greece to account and expect it to stick to its austerity programmes, heralding a potentially explosive showdown.
Again, with the ECB’s own Quantitative Easing program it becomes politically and logically impossible for the Bank and its two “troika” partners to maintain that Greece should continue with austerity. You cannot laud government deficit spending with one side of your mouth while criticizing it with the other.
As a strictly macroeconomic event, the ECB’s capitulation on austerity is not bad for Greece. The policies were not designed to lift the economy out of the ditch. They were designed to make big government more affordable to a shrinking private-sector economy. However, a return to government spending on credit is probably the only policy strategy that could possibly have even worse long-term effects than statist austerity.
Unfortunately, it looks like that is exactly where Greece is heading. Syriza’s “vision” of reversing years of welfare-state spending cuts is getting a lot of support from various corners of Europe’s punditry scene. For example, in an opinion piece at Euractiv.com, Marianna Fotaki, professor of business ethics at University of Warwick, England, claims that the Syriza victory gives Europe a chance to “rediscover its social responsibility”:
Greece’s entire economy accounts for three per cent of the eurozone’s output, but its national debt totals €360 billion or 175 per cent of the country’s GDP and poses a continuous threat to its survival. While the crippling debt cannot realistically be paid back in full, the troika of the EU, European Central Bank, and IMF insist that the drastic cuts in public spending must continue. But if Syriza is successful – as the polls suggest – it promises to renegotiate the terms of the bailout and ask for substantial debt forgiveness, which could change the terms of the debate about the future of the European project.
As I explained recently, so called “debt forgiveness” means that private-sector investors lose the same amount of money. The banks that received such generous bailouts earlier in the Great Recession had made substantial investments in Greek government debt. Would Professor Fotaki like to see those same banks lose even more money? With the new bank-rescue feature introduced as the Cyprus Bank Heist, such losses would lead to confiscation of the savings that regular families have deposited in their savings accounts.
Would professor Fotaki consider that that to be an ethically acceptable consequence of her desired Greek debt “forgiveness”?
Professor Fotaki then goes on a long tirade to make the case for more income redistribution within the euro zone:
The immense social cost of the austerity policies demanded by the troika has put in question the political and social objectives of an ‘ever closer union’ proclaimed in the EU founding documents. … Since the economic crisis of 2007 … GDP per capita and gross disposable household incomes have declined across the EU and have not yet returned to their pre-crisis levels in many countries. Unemployment is at record high levels, with Greece and Spain topping the numbers of long-term unemployed youth. There are also deep inequalities within the eurozone. Strong economies that are major exporters have benefitted from free trade, and the fixed exchange rate mechanism protecting their goods from price fluctuations. But the euro has hurt the least competitive economies by depriving them of a currency flexibility that could have been used to respond to the crisis. Without substantial transfers between weaker and stronger economies, which accounts for only 1.13 per cent of the EU’s budget at present, there is no effective mechanism for risk sharing among the member states and for addressing the consequences of the crisis in the eurozone.
In other words, Europe’s welfare statists will continue to blame the common currency for the consequences of statist austerity. But while professor Fotaki does have a point that the euro zone is not nearly an optimal currency area, the problems that she blames on the euro zone are not the fault of the common currency. Big government is a problem wherever it exists; in the case of the euro zone, big government has caused substantial deficits that, in turn, the European political leadership did not want to accept – and the European constitution did not allow. To battle those deficits the EU, the ECB and the IMF imposed harsh austerity policies on Greece among several other countries. But countries can subject themselves to those policies without being part of a currency union: Denmark in the 1980s is one example, Sweden in the ’90s another. (I have an entire chapter on the Swedish ’90s crisis in my book Industrial Poverty.) The problem is the structurally unaffordable welfare state, not the currency union.
Professor Fotaki again:
The member states that benefitted from the common currency should lead in offering meaningful support, rather than decimating their weaker members in a time of crisis by forcing austerity measures upon them. This is not denying the responsibility for reckless borrowing resting with the successive Greek governments and their supporters. However, the logic of a collective punishment of the most vulnerable groups of the population, must be rejected.
What seems to be so difficult to understand here is that austerity, as designed for Greece, was not aimed at terminating the programs that those vulnerable groups life off. It was designed to make those programs fit a smaller tax base. If Europe’s political leaders had wanted to terminate those programs and leave the poor out to dry, they would simply have terminated the programs. But their goal was instead to make the welfare state more affordable.
It is an undeniable fact that the politicians and economists who imposed statist austerity on Greece did so without being aware of the vastly negative consequences that those policies would have for the Greek economy. For example, the IMF grossly miscalculated the contractionary effects of austerity on the Greek economy, a miscalculation their chief economist Olivier Blanchard – the honorable man and scholar he is – has since explained and taken responsibility for.
Nevertheless, the macroeconomic miscalculations and misunderstandings that have surrounded statist austerity since 2010 (when it was first imposed on Greece) do not change the fact that the goal of said austerity policies was to reduce the size of government to fit a smaller economy. That was a disastrous intention, as shown by experience from the Great Recession – but it was nevertheless their goal. However, as professor Fotaki demonstrates with her own rhetoric, this point is lost on the welfare statists whose only intention now is to restore the welfare state to its pre-crisis glory:
The old poor and the rapidly growing new poor comprise significant sections of Greek society: 20 per cent of children live in poverty, while Greece’s unemployment rate has topped 20 per cent for four consecutive years now and reached almost 27 per cent in 2013. With youth unemployment above 50 per cent, many well-educated people have left the country. There is no access to free health care and the weak social safety net from before the crisis has all but disappeared. The dramatic welfare retrenchment combined with unemployment has led to austerity induced suicides and people searching for food in garbage cans in cities.
There is nothing wrong factually in this. The Greek people have suffered enormously under the heavy hand of austerity, simply because the policies that aim to save the welfare state for them also move the goal post: higher taxes and spending cuts drain the private sector of money, shrinking the very tax base that statist austerity tries to match the welfare state with.
The problem is in what the welfare statists want to do about the present situation. What will be accomplished by increasing entitlement spending again? Greek taxpayers certainly cannot afford it. Is Greece going to get back to deficit-funded spending again? Professor Fotaki gives us a clue to her answer in the opening of her article: debt forgiveness. She wants Greece to unilaterally write down its debt and for creditors to accept the write-down without protest.
The meaning of this is clear. Greece should be able to restore its welfare state to even more unaffordable levels without the constraints and restrictions imposed by economic reality. This is a passioned plea for a new debt crisis: who will lend money to a government that will unilaterally write down its debt whenever it feels it cannot pay back what it owes?
This kind of rhetoric from the emboldened European left rings of the same contempt for free-market Capitalism that once led to the creation of the modern welfare state. The welfare state, in turn, brought about debt crises in many European countries during the 1980s and ’90s, in response to which the EU created its Stability and Growth Pact. But the welfare states remained and gradually eroded the solidity of the Pact. When the 2008 financial crisis hit, the European economy would have absorbed it and shrugged it off as yet another recession – just as it did in the early ’90s – had not the welfare state been there. Welfare-state created debt and deficits had already stretched the euro-zone economy thin; all it took to sink Europe into industrial poverty and permanent stagnation was a quickly unfolding recession.
Ironically, the state of stagnation has been reinforced by austerity policies that were designed in compliance with the Stability and Growth Pact; by complying with the Pact, those policies, it was said, would secure the macroeconomic future of the euro zone and keep the euro strong. Now those policies have led the ECB to a point where it has destroyed the future of its own currency.
How much time does the euro have left? That question was put on its edge last week when the Swiss National Bank decided it was no longer going to anchor the Swiss franc to the iceberg-bound euro ship. It was a wise decision for a number of reasons, the most compelling one being that the euro faces insurmountable challenges in the years ahead.
In fact, the Swiss decision was de facto a death spell for Europe’s currency union. More specifically, I noted that the euro…
survived the Greek depression of 2012 by a razor-thin margin. Now it faces three very serious threats to its own survival. The first is the upcoming Greek elections, where anti-austerity, anti-euro, pro-Hugo Chavez Syriza looks like winners. Should they emerge victorious they could very well initiate a Greek exit from the currency union. The euro would survive that, and the German government has a contingency plan in place to stabilize the euro. But then there is the Greek government debt… Syriza has openly declared that they want “debt forgiveness” for governments throughout Europe. If the drachma is reintroduced, it will very likely plummet vs. the euro, making it exceptionally difficult for Syriza to repay its loans to the EU and the ECB. A default is within the realm of the probable; remember the Greek “debt write down” three years ago.
If all the problems for the euro were tied to Greece, the currency would indeed have a future. But there are so many other challenges ahead for the common currency that nothing short of a miracle – or unprecedented political manipulation – can keep it alive through the next three years.
The biggest short-term problem – Greece aside – is the pending announcement by the ECB of its own Quantitative Easing program. Reuters reports:
The European Central Bank will announce a 600 billion euro sovereign bond buying program this week, money market traders polled by Reuters say, but they also believe this will not be enough to bring inflation up to target. In the past two months traders have consistently predicted that the ECB would undertake quantitative easing, considered the bank’s final weapon against deflation. Eighteen of 20 in Monday’s poll said the bank would announce QE on Thursday.
This highly anticipated European QE program must be viewed in its proper macroeconomic context. It is going to be very different from the American QE program. For starters, the balance between liquidity supply and liquidity demand was very different in the U.S. economy than it is in the euro zone today. After its initial plunge into the Great Recession the American economy slowly but relentlessly worked its way back to growth again. Since climbing back to growth in 2010 the U.S. GDP has grown at a rate slightly above two percent per year. This is not something to throw a party over, but it has allowed the economy to absorb much of the liquidity that the Federal Reserve has pumped into the economy.
By being able to absorb liquidity, the U.S. economy has avoided getting caught in the liquidity trap. Growth rates have been good enough to motivate businesses to increase investment-driven credit demand; households have gotten back to buying homes and automobiles (car and truck sales in 2014 were almost as good as in pre-recession 2006).
The European economy does not absorb liquidity. It is stagnant, and has been so for three years now. The ECB has pushed its bank deposit rate to -0.2 percent, in other words it is punishing banks for not lending enough money to its customers. Despite this ample supply of credit there are no signs of a recovery in the euro zone, with GDP growth having reached the one-percent rate once in three years.
In other words, the positive outlook on the future that motivates American entrepreneurs and households to absorb liquidity through credit is notably absent in the European economy. When the ECB now evidently plans to pump even more liquidity out in the economy, it appears to not understand how significant this difference is between the euro zone and the United States.
Or, to be fair, with all its highly educated economists onboard, the ECB most certainly understands what role liquidity demand plays in an economy. Its pending decision to launch a QE program appears instead to be based in open ignorance of the lack of liquidity demand.
Which leads us to ask why they would ignore it.
The answer to this question is in the declared purpose of the QE program. If it is aimed at buying treasury bonds, then the QE program clearly is not designed to re-ignite the economy, an argument otherwise used. If QE is supposed to monetize government deficits, then its purpose is really to secure the continued existence of the European welfare state. If that is the purpose, then the only safe prediction is that there will be no end to QE before the welfare state ends.
That, in turn, means the ECB would be stuck monetizing deficits for the rest of the life of the euro. Which, under such circumstances, would be a relatively short period of time…
More on this on Thursday, when the ECB is expected to announce its QE program. Stay tuned.
Three years have passed since Greece simply nullified part of its debt. In the last quarter of 2011 the Greek government owed its creditors 356 billion euros; in the first quarter of 2012 that debt had been reduced to 281 billion euros, a reduction of 75 billion euros, or 21 percent. The banks that owned Greek treasury bonds were strong-armed by the EU and the ECB into accepting the debt write-down; ironically, that only added insult to injury as banks in, e.g., Cyprus started having serious problems as a result of precisely that same write-down.
As some of you may recall, a bit over a year after the Greek government unilaterally decided to keep some of the property lenders had allowed them to use – in other words wrote down their own debt – banks in Cyprus began having problems. Having invested heavily in Greek treasury bonds they had to take a disproportionately impactful loss on their lending to Athens. As a direct result the EU-ECB-IMF troika began twisting another arm: that of the Cypriot government. They wanted the government in Nicosia to order the banks in Cyprus to replenish their balance sheets with – yes – money confiscated from their customers.
That little episode of assault on private property is also known as the Cyprus Bank Heist.
Both these events, which exemplify reckless disrespect for private property and business contracts, make Bernie Madoff look like a Sunday school prankster. Unlike Madoff, government is established to protect life, liberty and property. But in both Greece and Cyprus government has voided property rights simply because it is the most convenient way at the time for government to fund its operations.
In other words, to protect the welfare state at any cost.
There were many of us who thought that Europe’s governments had learned a lesson from the massive protests against both the Greek debt write-down and the Cyprus Bank Heist. Sadly, that is not the case. Benjamin Fox, one of the best writers at EU Observer, has the story:
With fewer than three weeks to go until elections which seem ever more likely to see the left-wing Syriza party form the next Greek government, the debt debate has returned to the centre of European politics. Syriza’s promises to call an end to the Brussels-mandated budgetary austerity policies … are not new … But what is potentially groundbreaking is Syriza’s proposal to convene a European Debt Conference, modelled on the London Agreement on German External Debts in 1953 which wrote off around 60 percent of West Germany’s debts following the Second World War
Apparently, Syriza does not think twice about the actual consequences of their proposal. If it was carried out, it would have the same kind of effects on Europe’s banks as the last debt write-down. While there are no immediately reliable sources on how much of the Greek government debt is owned by financial corporations, we can get an indirect image from other euro-zone countries in a similar situation. In Spain, e.g., banks owned 54.3 percent of all government debt in 2013; in Italy the share was 55.6 percent while 41.2 percent of the French government were in the hands of financial corporations.
Adding up actual debt for these three countries, both total and the share owned by banks, gives us a financial-corporation share of almost exactly 50 percent. Using this number as a proxy for Greece, we can assume that banks own 160 billion of 320 billion euros worth of Greek government debt.
A Greek debt write-down according to the Syriza proposal would, if it cut evenly across the total debt, force banks to lose 86 billion euros. And this is under the assumption that, unlike the last write-down, banks are treated on the same footing as everyone else. Back then banks had to assume a bigger shock than other creditors.
The 2012 write-down was worth a total of 75 billion euros.
Has Syriza even taken into account that families, saving up for retirement, own treasury bonds? In Italy they own as much as ten percent of all government debt, a share that would equal 32 billion euros in Greece. But even if that number is five percent – 16bn euros – and you ask them to give up 60 percent of it, the impact on remaining private wealth in Greece would be devastating.
To make matters worse, Syriza does not confine their confiscatory dreams to their own tentative jurisdiction. Benjamin Fox explains that Syriza hopes that a write-down in Greece…
would lead to a huge write-down of government debt for … other southern European countries. The idea was initially mooted by Syriza leader Alexis Tsipras in 2012 when the left-wing coalition finished second in the last Greek elections. Roundly dismissed as fantasy for almost all the two years since then, the proposal is at the heart of the party’s campaign manifesto and Syriza insists it won’t back down if it wins the election.
In the three countries mentioned earlier, Italy, Spain and Greece, banks own a total of 2.47 trillion euros worth of debt. A 60-percent write-down of that equals 1.58 trillion euros. Compare that, again, to the total Greek write-down of three years ago of 75 billion euros.
In Italy alone households own 215 billion euros in government debt. Is the socialist cadre leading Syriza ready to rob them of 89 billion euros just to improve their government’s balance sheets? That would be 1,500 euros for every man, woman and child in Italy. Obviously, all of them do not own government debt, but the more concentrated the ownership is the bigger the impact will be on their economic decisions.
This is, for all it is worth, an idea of galaxy-class irresponsibility. If it ever became the law of the land in Europe it would set off a financial earthquake far beyond what the continent experienced in 2009. And I keep repeating this: all of this is under the assumption that banks will not be discriminated against – an assumption that is not likely to survive all the way to a deal of this kind. Europe’s socialists have a tendency to despise banks and consider them unfair, even illegitimate institutions. It is possible that Syriza, at least as far as Greece is concerned, would force banks to eat the entire write-down loss.
But is this really worth all the drama? After all, the Greek election is three weeks out. Benjamin Fox notes that “Syriza is so close to taking power that the proposal deserves to be taken seriously.”
This debt write-down is part of a broader plan that Syriza has put in place for the entire European Union. To work at the EU level the plan would have to be more complex and involve a series of transactions involving the European Central Bank that, frankly, amount to little more than macro-financial accounting trickery. At the end of the day, those who have lent money to Europe’s governments would make losses worth trillions of euros.
As things look today it is not very possible that Syriza would have it their way across the EU. But it is almost certain that they will go ahead and do it in Greece. What the ramifications would be for the Greek economy is difficult to predict at this point – suffice it to say that the storm waves on the financial ocean that is the euro zone will rise again, and rise high, if Syriza wins on January 25.
The stagnant European economy does not need more bad news. Unfortunately, there is more coming. Business Insider reports:
The amazing collapse in German bond yields is continuing. Today, five-year bonds (or bunds) have a negative nominal return for the first time ever. That means that investors buying a 5-year bond on the market today will effectively be paying the German government for the privilege of owning some of its debt. This has been happening for some time now. In 2012, people were amazed when 6-month bund yields went into negative territory. In August, the two-year yield went negative too. Less than a month ago, the same thing happened with the country’s four-year bunds.
While there is a downward trend in bond yields in most euro-zone countries, there is a clear discrepancy between first-tier and second-tier euro states. Ten-year treasury bond yields, other than Germany:
- Austria, 0.71 percent, trending firmly downward; France, 0.83 percent, trending firmly downward; Netherlands, 0.68 percent, trending firmly downward; Italy, 1.87 percent, trending firmly downward.
A couple of second-tier examples:
- Ireland, 1.24 percent, trending weakly downward; Portugal, 2.69 percent, trending weakly downward.
Greece is the real outlier at 9.59 percent and an upward yield trend. But Greece is also a reason why Germany’s bond yields are turning negative. Although the Greek economy is no longer plunging into the dungeon of depression, it is not recovering. Basically, it is in a state of stagnation. Its very high unemployment and weak growth is coupled with an ongoing austerity program, imposed by the EU, the ECB and the IMF.
Add to that the political instability which, in late January, will probably lead to a new, radically leftist government. Syriza’s ideological point of gravity is the Chavista socialism that has been practiced in Venezuela over the past 10-15 years. They are also vocal opponents to the EU-imposed austerity programs, an opposition they would have to deliver on in case they want to stay relevant in Greek politics.
If Greece unilaterally ends its austerity program, it de facto means the beginning of their secession from the euro. That in turn would raise the possibility of other secessions, such as France, where a President Le Pen would begin her term in 2017 with a plan to reintroduce the franc. When that happens, the euro is history.
There is no history of anything similar happening in modern history, which makes it very difficult for anyone, economist or not, to predict what will happen. Europe’s political leaders will, of course, want to make the transition as smooth and predictable, but without experience to draw on there is a considerable risk that the process will be neither smooth nor politically controllable. Add to that the inability of econometricians to forecast the transition; based on the numerous examples of forecasting errors from the past couple of years, there is going to be little reliable support from the forecasting community for a rollback of the euro.
That is not to say the process cannot be a success. But the window of uncertainty is so large that it alone explains the investor flight to German treasury bonds.
This uncertainty is also throwing a wet blanket over almost the entire European economy, an economy that desperately needs growth and new jobs. Since 2010 the EU-28 economy has added 800,000 new jobs, an increase of 0.37 percent. For comparison, during the same time the American economy has added eleven million jobs, an increase of a healthy 8.5 percent.